Risk adjustment may influence insurers’ profitability in the health insurance marketplace, and the volatility of profit results may be highly linked to insurers’ plan size. In this analysis, Milliman consultants examine how risk adjustment might influence profitability patterns and whether those patterns change with the size of a health plan. The authors also address main concepts behind two sets of proposals that have emerged to improve the risk adjustment program, with the aim of reducing financial volatility.
What will happen to a health plan that enrolls a different mix of members in 2014 than anticipated? Beginning in 2014, when major provisions of the Patient Protection and Affordable Care Act (ACA) become effective, including guaranteed issue and community rating, many people with poorer health will have the opportunity to purchase insurance—some for the first time—and at premium rates the same as those charged to their healthier peers. Insurers are wary of the unknown financial impacts inherent in this market shift.
To address this risk, the federal government introduced the “three Rs” to help insulate insurers. In this paper, Jason Petroske and Jason Siegel explore the net impact of these programs, in particular risk adjustment, when members of varying characteristics are enrolled in a plan. The authors investigate the financial impact to a health plan of enrolling a membership base with different demographic and morbidity characteristics than those that were anticipated when developing rates.